CESTAT Sets Aside Ex Parte Rejection of Compounding Plea, Directs Fresh Hearing Post Duty Adjudication [Read Order]

The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai, has quashed the ex parte rejection of a compounding application filed under Section 137(3) of the Customs Act, 1962.

In this case, the bench noted that the application filed by Dipakkumar Dharamsinbhai Kakadiya and others was dismissed by the Chief Commissioner of Customs, Nhava Sheva, without affording a hearing, and held it to be a clear violation of the principles of natural justice.

The appellants had approached the compounding authority seeking immunity from prosecution amid an ongoing DRI investigation concerning the alleged undervaluation of imported dry fruits such as almonds, pistachios, and walnuts.

The application was filed before any show cause notice or prosecution had been initiated, relying on Section 137(3) of the Customs Act, which permits such applications either before or after prosecution begins.

While one of the appellants had already been arrested and was in judicial custody, the others had concurrently filed anticipatory bail applications before the Bombay High Court.

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The day before these applications were scheduled for hearing, the compounding authority rejected their plea without a hearing, labeling it premature due to non-payment of customs dues—a move that the Tribunal found procedurally and legally flawed.

Revenue defended the rejection, arguing on both grounds of maintainability and procedural deficiencies, including the absence of duty determination and payment. But the Tribunal was unconvinced. Citing precedents from the Gujarat, Telangana, and Bombay High Courts, as well as earlier rulings of the Tribunal itself, it held that an order passed by the Chief Commissioner under Section 137(3) qualifies as an adjudicatory order appealable under Section 129A of the Act. The Tribunal also rejected the argument that such matters must be heard only by a division bench, observing that no issue concerning the rate of duty or valuation was involved.

The Tribunal observed that the Chief Commissioner failed to comply with the procedural safeguards under Rule 4 of the Customs (Compounding of Offences) Rules, 2005, as the latter neither called for a report from the investigating authority nor provided the applicants with an opportunity to be heard, as required under the rules.

The Tribunal was of the opinion that the second proviso to Rule 4(3), which requires duty, penalty, and interest to be paid before compounding, is relevant only at the stage of allowing the application, not at the stage of preliminary consideration or rejection.

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The Tribunal noted that the appellant had made detailed disclosures and explicitly undertaken to pay the dues and compounding fee as determined by the authority. The order rejecting their application was silent on what constituted an alleged failure to make a full and true disclosure, another ground used to deny relief.

The Tribunal took note of the DRI’s own affidavit filed before the Bombay High Court, in which it unequivocally stated that the application had been “rejected,” contradicting their later claim before the Tribunal that it was only held “inadmissible.”

The Tribunal also criticized the timing of the rejection, observing that it came just a day before the High Court was to hear the anticipatory bail pleas. The hasty rejection, it noted, seemed intended to undermine the appellants’ legal position rather than comply with procedural fairness.

In conclusion, the Tribunal set aside the impugned order and directed the Chief Commissioner to reconsider the compounding application afresh after the duty, interest, and penalty are adjudicated. The Tribunal directed that the rehearing must conform strictly to legal norms and the principles of natural justice, cautioning the authority to remain uninfluenced by any observations made in the order.

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